Basic Overview
Overall many of the various taxes for which a UK resident is liable – with the exception of VAT – are in some way keyed to income taxes. The basic formula for this is to add up your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference.
For the 2023/24 tax year, all individuals are permitted a personal allowance of £12,570, making income below this level tax-exempt. UK income tax rates are in steps depending on your income. These steps, or bands, also determine other tax rates, such as capital gains.
HMRC reported that £786.59bn was collected in the Tax-Year 2022/23, an increase of around £71bn from the previous tax-period. All of the United Kingdom is subject to the British fiscal system, including Wales, Northern Ireland, England, Scotland (with several notable exceptions due to the country’s own legal system), and many of the smaller islands that surround the British coast. It also covers oil drilling platforms in British territorial waters, with the notable exceptions of the Isle of Man and the Channel Islands.
With the exception of a little exemption for income tax purposes, spouses are treated as independent entities and subject to individual taxation in the UK, which is an intriguing feature of the tax system.
Value Added Tax (VAT), income taxes, capital gains taxes, property taxes, and inheritance taxes are examples of basic UK taxes. A large number of these taxes are progressive, meaning that the rate is higher for people with higher incomes. Your taxes are tied to your National Insurance number, which is given to most UK citizens at 16 years-old, whilst those without citizenship may need to apply for a Skilled Worker visa – including EU citizens. Locally, you will be subject to council taxes that will of course be administered by your local government but for the purposes of this article, we will be focusing on the federal taxation system.
Federal Taxation
In the United Kingdom, taxes can be paid to three separate levels of government: HMRC, the federal government, devolved governments (particularly Scotland), and local governments through council taxes. HMRC is responsible for Income Tax, CGT, Corporation and Inheritance Tax, amongst many other central taxes.
Income Tax forms the largest source of revenue for the HMRC, followed by National Insurance Contributions (NIC). You pay Income Tax on money you earn from your employer or profits you make if you’re self-employed, whilst outside of the employment sphere you will be taxed on things such as trusts, pensions and rental income. You will not pay income tax on the first £1k you earn from either self-employment or rental income, as well as tax efficient savings accounts like ISA’s.
| Applicable rate | UK Tax rate | Salary applied to |
| Basic Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional rate | 45% | Zero-rated goods and services (e.g., food and children’s clothes) |
Value Added-Tax
Value-Added taxes (VAT) in the UK apply to almost all goods and services. These may also be applicable to goods that you bring to the UK from abroad if you exceed the limits. The standard commercial tax rate in the UK is 20%, although certain goods and services are subject to lower UK commercial tax rates. VAT exemptions are also available on certain items, for example, long-term medical supplies.
| Applicable rate | UK Tax rate | What the rate applies to |
| Standard | 20% | Most goods and services |
| Reduced rate | 5% | Some goods and services (e.g., baby car seat) |
| Zero rate | 0% | Zero-rated goods and services (e.g., food and children’s clothes) |
During their visit, tourists and visitors to the UK are able to purchase without paying any taxes. If they take these products with them when they depart the UK, they are entitled to a refund of any VAT they paid for goods purchased within the nation.
Generally, you pay a fee to the retailer or return company in order to use tax-free shopping. Refunds of this kind must be requested by the final day of the third month following the month of purchase. Only visitors, tourists, and UK citizens residing overseas for a minimum of 12 months are eligible for these.
Value Added-Tax
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This is not advice that is applicable across the board – this is simply a guide to help you understand the UK Taxation system and how it can affect you. In order to make use of this advice, staying informed or speaking with a Financial Adviser can help you implement certain practices to ensure you make the most of any potential tax benefits.